Higher interest rates are lifting the fortunes of the nation’s biggest banks. They aren’t doing the same for the banks’ customers.
Earnings for JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) all rose in the third quarter largely because high rates allowed them to rake in more interest income.
Their scale allows them to leverage those rates by charging more for loans while holding down how much more they pay for deposits when compared to smaller rivals.
These advantages show up in a key profitability metric known as net interest income, which measures the difference between what banks make on their loans and pay for their deposits.
That number was up by sizable amounts at all three banks when compared to the same period a year ago. Together the lenders pulled in a record $50 billion, 18% more than the same period last year. JPMorgan and Wells Fargo even lifted their guidance for how much net interest income they would earn for the full year.
Yet there were also clear signs that some of their borrowers are starting to struggle. JPMorgan, Citigroup, and Wells Fargo all increased the amount of loans they wrote off as losses. The combined charge-offs at those three banks totaled $3.98 billion, up 31% from the previous quarter and 105% from the same period a year ago.
The total was the highest amount collectively for the three lenders since the early days of the pandemic, in the second quarter of 2020.
At Citigroup, CEO Jane Fraser warned that US consumers were cutting back. “Continued deceleration in spending indicates an increasingly cautious consumer,” she said in a release.
Affluent customers, she added, are accounting for almost all of the spending growth and weakness is showing among those with lower credit scores. Citi expects its credit card losses to reach pre-COVID levels by the end of the year.
Wells Fargo CEO Charlie Scharf said even as the economy remains resilient “we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly.”
Wells Fargo had charge-offs of $850 million, $622 million from consumer loans. The bank expects its net interest income to fall 3% from the third quarter to the fourth.
“Where Wells Fargo sees weaknesses,” according to CFO Mike Santomassimo, is in commercial real estate, and “I think we will see some loss pickup in that portfolio over time.”
JPMorgan CEO Jamie Dimon struck a more somber tone. He said consumers and businesses “generally remain healthy” but consumers are spending down their excess cash buffers at a time when inflation risks remain elevated, increasing the possibility that interest rates could go even higher.
Wars in Ukraine and Israel, he added, could also impact energy, food markets, global trade, and geopolitical relationships.
“This may be the most dangerous time the world has seen in decades,” he said.
He admitted that the bank has been “over-earning on both net interest income and below normal credit costs, both of which will normalize over time.” He told reporters there is a “big debate” within the bank about when that normalization will happen.
“I personally think it will happen a little sooner than Jeremy,” he said, referring to his CFO.
Dimon, S&P Global Market Intelligence director for financial institutions research Nathan Stovall told Yahoo Finance on Friday, was “trying to throw out some caution.”
The bank, he added, knows credit costs are going to go up. “They are trying to prepare the Street that you could see tougher times ahead.”
One regional bank, PNC (PNC), demonstrated the problems that smaller lenders have navigating this period of higher rates. Its profits and revenue fell from a year ago, as did its net interest income. It expects net interest income to fall again in the fourth quarter when compared to the third.
The Pittsburgh bank said it would reduce its staff by roughly 4%, saving $325 million. Several other regional banks, including Truist (TFC), have also eliminated jobs in recent months as they adjust to more uncertain economic conditions.
PNC’s stock fell 3% Friday while Citigroup’s stock sold off slightly in the later part of the day. JPMorgan and Wells Fargo both rose.
“The inflection point,” PNC CEO William Demchak said in response to a question about whether PNC’s net interest income had reached a trough, “I think is entirely dependent on what happens with the Fed in the coming year.”
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